Market Insight Editorial & Advice to Tenants: 3Q2014

Tenants---how many alternative spaces are available to YOU to suit your requirement? Isn't this part of the core litmus test of how soft or tight the market really is? See our chart, below. We track the changes for all size ranges of tenants in these reports….from quarter to quarter. If you want real-time data, please call me.

If you’re in search of intelligent life in the brokerage community…please enjoy this Editorial with my compliments. And, here are the last 10 years of pearls of wisdom:

Dan Mihalovich
President, Mihalovich Partners
Founder, The Space Place®

How Do You Spell "BUBBLE"?! Evidence Appears.

When everyone is bullish, perhaps it's time to run for the door. There's more steel coming out of the ground in the Bay Area than any of us can recall. All thanks to the Fed, who's been printing $80B monthly for years, artificially and voraciously hyper-increasing asset values. Cheap money has obviously also fueled VC and Angel investment in ways reminiscent to the old DotCom days. Growth and management of "new" companies may smell far greater than back then, but ridiculous valuations abound for companies public and private that earn no profits. Here in Camelot (San Francisco), the nation's tighest office market, landlords portend that the sky is the limit for rental rates, despite the fact that 80% of the tenants (who are non-tech) cannot afford to pay current rates. Never mind, we're told. With over 6M square feet of tenants in the market looking for space, we'll soon run out of places to work – even considering buildings under construction and renovation, like the new 61-story Salesforce Tower, already 50% preleased but not a story-high with steel.

One bubble-to-go, please:

  • Weakening has appeared, as you'll read below. Will we see a crash like we did during the DotBomb? Likely not, but seriously, who can say for sure? Not a one of us has perfect insight, not even Bill Gross. The DotBomb cliff was dramatic: In San Francisco, vacancies quickly doubled, then tripled – adding 10M square feet of vacancy within ~15-month period of time. 10M square feet – the amount of space now available in San Francisco.
  • "Negative Absorption" is back! Does anyone recall this phenom? When more space comes on the market than is actually leased. Q3, 2014 experienced negative absorption in the East Bay (Contra Costa and Alameda Counties) and in Marin County. San Francisco and San Mateo Counties remained seriously positive, but read further.
  • Deal flow is way off….throughout the Bay Area. If there's one thing landlords/landlord brokers love, it's momentum. Once momentum slows, as it's now showing virtually everywhere, when coupled with deliveries of new buildings, renovations and new sublease space….things can get softer in a hurry.
  • New space on the market, last 45 days: It's impressive. Over 4M square feet of space came on the market in San Francisco; and over 5.5M in the East Bay. Given more choices and the ever-increasing advantages to leave San Francisco's soaring rates, pressures will mount to listen to market dynamics and tax incentives to head for the bridges outbound.
  • Everyone loves a stock-darling, but seriously – companies that earn no profits? How long will YOUR partners allow you to run your firm without profits? If your partners are private equity funds, pension money, VC funds or largely uninformed and oftentimes the misled American public….perhaps for years! But at some point, fundamentals do take hold. Some of our favorite Bay Area publicly-traded starlettes who've yet to find the black ink:
    • Twitter. Tesla. FireEye. Marketo. Chegg. Rocket Fuel. Gigamon. Five Prime Therapeutics. YuMe. Relypsa. Splunk. Bebe. Zynga. Marin Software. Model N. Ring Central.

Making Sense of Leasing at the Top of the Market.

The bottom line is that it may not make sense, at least not as in a conventional market. Strategy and planning is paramount right now. Your competitors, who secured space during a much softer market, will hold a clear advantage over your firm if your current actions aren't well thought out and executed effectively. Lease renewals, which appear to be the path of least resistance, may be elusive these days with landlords more than willing to face vacancy.

Call us to schedule a strategy session.

Here's what we wrote during the height of the DotCom hysteria:

"Let's be clear on at least one thing: Brokers are not having an easy time in this tight marketplace. Period. Positioning our clients so that an owner will immediately be well informed about the company, its financial wherewithal, clients and references, executive team, partners and backers is no small chore. Our clients need services from other team members, too, such as architects, contractors, telecom connections, furniture people, etc. Your broker should be able to introduce you to vendors (a) who are really and truly available, since business is booming and few who are worthwhile aren't up to their eyeballs in work; and (b) who can take the ball and run with it, no matter what type of building or space you pursue. Once at the negotiating table, this team—led by your broker—has to show the ability to out-perform the competition. If you have better information and higher organization than the other guys do, you'll stand a far better chance of winning the space. Don't forget your checkbook."

If Your Lease Will Expire Within The Next Three Years…

or if there is another compelling reason to discuss your firm's office leasing situation, please call us. For qualified tenants, we offer the following pre-contract services:

  • Free preliminary office lease and operating expense review;
  • Free consultation to discuss project management, Team formation and project schedule;
  • Market surveys and our specific tenant-driven leasing recommendations ; and
  • Assistance in selection and coordination of all Team members throughout planning and negotiation phases.

Vacancy Rates: Are Your Options Fading?

Tenants should watch carefully to detect how and to what extent your field of options changes. Which size blocks of space are getting leased?

Discussing vacancy and absorption rates can be confusing to some. What language makes sense to tenants? Tenants ask, "Tell me about my specific options. How many choices do I have?"

Are your options fading as a result of leasing activity? Review the chart, below, and let's discuss.

HOW MANY BLOCKS OF SPACE ARE AVAILABLE FOR YOU? San Francisco County San Mateo County Santa Clara County East Bay Counties
Q1’13 Q3’14
5,000–9,999 sq. ft. 316 277 Call us for more info
▼ 12%
10,000–19,999 199 173
▼ 13%
20,000–29,999 69 58
▼ 16%
30,000–39,999 29 15
▼ 52%
40,000–49,999 15 10
▼ 33%
50,000+ 49 31
▼ 37%

You can request a free space survey, containing all direct and sublease space meeting your specific requirements. We can also provide building photographs, floor plans, leasing histories and more. To discuss your space needs in person, call 415-434-2820 or email

Who Has the Most Incentive to Drive Up Rental Rates In San Francisco?

When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which of our competitors—leasing firms—do the most landlord representation? Who's marketing the most space in San Francisco?

The top companies controlling the most space available are NOT landlords….Rather, they are office leasing brokerage firms acting with the landlord's interest in mind. They are:

Cushman & Wakefield
Newmark, Cornish & Carey

These brokerage firms control over 60% of all listings and are beholden to 400 local landlords, paid to drive up rental rates and drive down concessions for tenants.

Since their allegiance is committed to so many landlords, how can they possibly represent YOUR interests—the tenant's interests—objectively and aggressively?

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